What is an Interest Rate?



What is an Interest Rate?

The interest rate can be defined as the price of money. It is how much you pay to borrow money. As well as how much you get paid when you save or invest. When this happens, the interest rate is also known as a return on investment.

Who Calculates Interest Rates?

The country’s interest rate is determined by the South African Reserve (Central) Bank (SARB). They set what is known as the prime rate. This is also known as the repo rate. It is how much the SARB charges to lend money to commercial banks. It is therefore the prescribed rate of interest. The banks in turn, charge customers prime plus a percentage. Thus, the percentage interest rate you pay is in addition to the prime amount.

Can Interest Rates go up?

The country’s repo rate (prime interest rate), is impacted by many factors. For example, inflation and the SARB’s monetary policy. Therefore, the interest rate can increase or it can fall as it is impacted by changes within the broader economy.

How Does the Interest Rate Affect You?

The basic interest rate calculation for a loan is: Prime + X. The starting point of any personal or business loan is the repo rate (prime interest rate). Then an additional amount (X) is added onto it. The total of these two numbers is the interest rate a lender proposes when they extend a loan offer. Practically, for you, this means that the interest rates lender’s offer you can vary. Your personalised interest rate is also usually based on your risk profile.

Different Types of Interests for Loans

When you borrow money, you are often offered the choice between a floating interest rate and a fixed interest rate. If you choose a floating interest rate, then your loan’s interest will move up and down. This is in accordance with the SARB’s repo rate changes. In contrast, when a fixed interest rate is agreed upon, the interest rate doesn’t change during the loan period. It is therefore wise to calculate your loan costs ahead of signing to see which option is best for you.

The Interest Rate Affects the Cost of Your Loan

How is a Loan’s Interest Rate Calculated?

When you apply for a personal or business loan, you are usually asked questions and asked for specific documents. Based on this, the lender builds your risk profile. Your interest rate is determined by your risk profile. For a personal loan, factors like credit record, your salary and existing debt are looked at. Therefore, if you are blacklisted or have a bad credit rating, the interest rate of your loan could be quite high. Note that many institutions will not lend money to those with a bad credit record. For a business loan application, a lender, for example, could consider the company’s financial records, assets, structure and marketing plan.

How to get the Best Interest Rates

Are you looking for the lowest interest rates for personal loans in South Africa? One of the ways that you can access a low interest rate is to take out a collateral loan. Gold backed loans use what you already own to stand surety for a personal or business loan. Because of this, Coughlans can offer very competitive interest rates. As well as cash loans, with easy terms, that are able to be extended to those with bad credit records.

Visit one of our stores today for a Gold or Gold Jewellery appraisal by one of our experts. We have over 110 years’ experience in bringing cash loans to people and businesses when they need it most.

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